UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
June 23, 1999
(Date of Report)
AJAY SPORTS, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
0-18204 39-1644025
- ------------------------- ----------------------------
(Commission File Number) (IRS Employer Identification
Number)
1501 E. Wisconsin Street, Delavan, Wisconsin 53115
(Address of principal executive offices including zip code)
(414) 728-5521
(Registrant's telephone number, including area code)
<PAGE>
Item 7. Financial Statements and Exhibits
a) Financial statements of business acquired.
The financial statements of Pro Golf of America, Inc. for the years ended
October 31, 1998 and 1997 and reports of Independent Certified Public
Accountants.
The interim financial statements of Pro Golf of America, Inc. for the eight
months ended June 30, 1999.
b) Unaudited pro forma financial information.
The pro forma financial statements are presented to show the financial
position of Ajay Sports, Inc. (Ajay) and Pro Golf of America (Pro Golf) as
if the purchase occurred June 30, 1999 and the results of their operations
for the six months ended June 30, 1999 and the year ended December 31, 1998
as if the acquisition had occurred on the first day of each respective
period.
These pro forma financial statements have been prepared for comparative
purposes only and do not purport to indicate what necessarily would have
occurred had the entities been combined since the applicable date, or what
results may be in the future.
(1)(a)Pro forma condensed consolidated balance sheet of Ajay and Pro Golf as of
June 30, 1999.
(1)(b) Pro forma condensed consolidated statement of operations of Ajay and Pro
Golf for the six months ended June 30, 1999.
(1)(c) Pro forma condensed consolidated statement of operations of Ajay and Pro
Golf for the year ended December 31, 1998.
(1)(d) Notes to pro forma condensed consolidated financial statements.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused the report to be signed on its behalf by the
undersigned hereunto duly authorized.
September 7, 1999 AJAY SPORTS, INC.
S/Ronald N. Silberstein
--------------------------
Ronald N. Silberstein
Chief Financial Officer
<PAGE>
PRO GOLF OF AMERICA
FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 1998 AND 1997
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors and Stockholders PRO GOLF OF AMERICA, INC.
We have audited the accompanying balance sheets of PRO GOLF OF AMERICA,
INC. as of October 31, 1998 and 1997, and the related statements of income,
retained earnings, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PRO GOLF OF AMERICA, INC. at
October 31, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/Woronoff Hyman Levenson & Sweet PC
- ------------------------------------------------------
Woronoff Hyman Levenson & Sweet PC
Certified Public Accountants
January 20, 1999
<PAGE>
PRO GOLF OF AMERICA, INC.
BALANCE SHEETS
OCTOBER 31, 1998 AND 1997
1998 1997
-------------------- ------------------
ASSETS
Current Assets
Cash $ 240,491 $ 99,905
Accounts Receivable 535,400 557,388
Loan Receivable 0 98,737
Prepaid Advertising 0 25,148
Note Receivable 0 22,500
Prepaid Corporate Income Tax 57,900 0
----------- -----------
Total Current Assets 833,791 803,678
---------- -----------
Property and equipment, net 100,052 118,096
Trademark, net 365 622
Goodwill, net 30,000 33,334
--------- -----------
Total Assets $ 964,208 $ 955,730
========== ===========
LIABILITIES AND EQUITY
Current Liabilities
Accounts Payable $ 75,489 $ 88,726
Franchise Deposits 15,000 10,000
Accrued Expenses 166,000 104,500
Income Tax - Current 0 39,675
Income Tax - Deferred 74,800 101,600
------ -------
Total Current Liabilities 331,289 344,501
Deferred Income Taxes 8,100 10,100
Stockholders' Equity
Common Stock
Authorized 50,000 shares; $1 par
Issued and Outstanding 1,000 shares 1,000 1,000
Retained Earnings 623,820 600,129
------- -------
Total Stockholders' Equity 624,820 601,129
Total Liabilities and
Stockholders' Equity $ 964,208 $ 955,730
========= ========
SEE THE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
<PAGE>
PRO GOLF OF AMERICA, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED OCTOBER 31, 1998 AND 1997
1998 1997
------------- ------------
REVENUES $ 4,354,203 $ 3,829,732
OPERATING EXPENSES 4,273,912 3,510,341
--------- ----------
OPERATING INCOME (LOSS) 80,290 319,391
OTHER INCOME (EXPENSES) 0 (559)
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT ADJUSTMENT 80,290 318,832
PROVISION FOR INCOME TAXES
Current 85,400 133,000
Deferred (28,800) 9,300
----------- -----------
TOTAL INCOME TAXES 56,600 142,300
----------- -----------
NET INCOME ( LOSS ) 23,690 176,532
RETAINED EARNINGS, BEGINNING 600,129 423,598
----------- -----------
RETAINED EARNINGS, ENDING $ 623,820 $ 600,129
=========== ===========
SEE THE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
<PAGE>
PRO GOLF OF AMERICA, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
--------------- ---------------
Cash flows from operating activities:
Net Income (Loss) $ 23,690 $ 176,532
---------------- ----------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 21,322 20,994
Amortization 3,591 3,591
Change in assets and liabilities:
Restricted Cash - NBD Escrow 0 25,139
Accounts Receivable 44,488 (188,503)
Prepaid Corporate Income Tax (57,900) 0
Other Current Assets 25,148 168,524
Accounts Payable (13,237) 9,539
Accrued Expenses 61,500 25,326
Advertising Fund Not Expended 0 (15,000)
(Gain)Loss on Disposition of Assets 0 910
Income Taxes
Current (39,675) (28,025)
Deferred (28,800) 9,300
Franchise Deposits 5,000 (2,404)
Franchise Deposits - Escrow 0 25,139
--------------- --------------
Total Adjustment 21,437 4,252
--------------- --------------
Net cash provided by operating activities 45,127 180,783
--------------- --------------
Cash flows from investing activities:
Purchase of equipment (3,279) (5,167)
--------------- --------------
Cash flows from financing activities:
Net Borrowings:
Debt Reduction:
Bank Note payable 0 (19,500)
Loan Receivable - Officer 98,737 ( 98,737)
--------------- ------------
Net cash provided (used) by financing activities 98,737 (118,237)
--------------- -------------
Net increase (decrease) in cash 140,586 57,379
Cash at beginning of year 99,905 42,526
--------------- -------------
Cash at end of year $ 240,491 $ 99,905
=============== =============
Supplemental Data:
Cash paid during the year for:
Interest $ 0 $ 869
Income Taxes $ 165,000 $ 141,773
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
</TABLE>
<PAGE>
PRO GOLF OF AMERICA, INC.
NOTES TO THE FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
1. NATURE OF ENTITY
Pro Golf of America, Inc. (the "Company") was incorporated in the State of
Michigan on September 1, 1975. The Company licenses retail golf franchises in
the United States, Canada and Philippines and provides continuing marketing,
technical, administrative and consultation services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF SIGNIFICANT INITIAL SERVICES
When a franchise is purchased, the Company agrees to provide certain services to
the new franchisee.
Among the services provided by the Company are assistance in lease negotiation,
store layout, retail sales training, custom club fitting, implementation of an
accounting system, purchasing and pricing programs, and the design of a customer
service program.
REVENUE RECOGNITION
Royalty Fees are a percentage of a franchisee's monthly gross receipts, as
defined in the franchise agreement.
Initial Franchise Fee revenue from franchise sales are recognized when all
material services or conditions relating to the sale have been substantially
performed or satisfied by the franchisor. Substantial performance for the
franchisor means that (a) the franchisor has no remaining obligation or intent
to refund any cash received or forgive any unpaid notes or receivables; (b)
substantially all of the initial services of the franchisor required by the
franchise agreement have been performed, and (c) no other material conditions or
obligations relating to the determination of substantial performance exists.
Revenues consist of the following for years ended October 31,
1998 1997
------------ -----------
Royalty Fees $2,947,394 $2,793,258
Initial Franchise Fees 428,112 396,729
National Advertising Revenue 679,380 364,931
Other Income 299,317 274,814
------------ ------------
$4,354,203 $3,829,732
<PAGE>
National Advertising Revenue of $679,000 and $365,000 represents revenue
for marketing programs conducted during the years ended October 31, 1998
and 1997. Advertising expenses included in operating expenses were
$587,500 and $653,000 during the years ended October 31, 1998 and 1997,
respectively (see Advertising below).
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts Receivable - Royalties and Accounts Receivable - Advertising are
presented net of an allowance for doubtful accounts of $32,000 and
$52,520, respectively, as of October 31, 1998. Accounts Receivable as of
October 31, 1997 were substantially all collectible and, thus, no
allowance was necessary.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed over
the estimated useful lives of the assets using the straight-line method.
Depreciation expense was $21,322 and $20,994 in the years ended October 31,
1998 and 1997, respectively.
INTANGIBLE ASSETS
The trademark's cost of $4,375 is being amortized over a 17-year period.
Goodwill of $50,000 is being amortized over a 15-year period. Amortization
expense was $3,591 in the years ended October 31, 1998 and 1997.
ADVERTISING
The Company's policy is to expense production costs for advertising as of
the date the commercials and marketing materials are initially utilized.
Prepaid advertising represents expenditures which, under this policy, are
capitalized at year end and expensed during the following fiscal year. (See
Revenue Recognition above).
STATEMENT OF CASH FLOWS
The Company considers all bank accounts to be cash equivalents. The impact
of changing foreign currencies was not material.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts for the year ended October 31, 1997 have been reclassified
to conform with the presentation of October 31, 1998 amounts. The
reclassification has no effect on net income for the year ended October 31,
1997.
<PAGE>
PRO GOLF OF AMERICA, INC.
NOTES TO THE FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
3. FRANCHISES IN OPERATION
The franchise activity for the year ended October 31, 1998:
Operating at beginning of year 158
Franchises opened 12
Franchises closed (10)
----
Operating at end of year 160
----
4. COMMITMENTS AND CONTINGENCIES
The Corporation leases its building from the principal shareholders of the
Company. The lease is classified as an operating lease with minimum rental
commitments at October 31, 1998 as follows:
Year ended October 31, 1999 10,000
------
$10,000
------
The lease provides for payment of taxes and other expenses to be incurred
by the Company. During the years ended October 31, 1998 and 1997, rental
expense was $120,000, which was paid to the principal shareholders. The
lease expired on November 30, 1998 and will continue on a month to month
basis on the same terms.
The Company has guaranteed a term loan to NBD Bank, N.A. on behalf of the
Company's principal shareholders. The loan proceeds were used to purchase
the Company's office building. The original loan, which had quarterly
payments due through October, 1998, required a balloon payment of $480,000
during October, 1998. Subsequent to year-end, the loan was refinanced with
similar payment terms and the balloon payment was not made. The new loan,
dated December 4, 1998, requires quarterly payments of $17,000 through
December, 2003 and is secured by the building. The outstanding balance of
the loan as of October 31, 1998 was $477,347.
The Company is the defendant in a pending lawsuit, which it is vigorously
defending. The Company expects to obtain a favorable judgement in the case.
However, the ultimate outcome of this litigation is unknown at the present
time. The amount of any potential loss cannot be estimated at this time,
although it may be material relative to the financial position, results of
operation or liquidity of the Company. Accordingly, no provision for any
liabilility resulting from this litigation has been made in the
accompanying financial statements.
<PAGE>
PRO GOLF OF AMERICA, INC.
NOTES TO THE FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
5. RELATED PARTY TRANSACTIONS
One franchise was opened during the current year by an entity whose
principal shareholders are shareholders of the Company. See further
discussions of related party transactions in Note 4.
6. Federal Income Tax
Federal income tax expense is based on reported earnings before income
taxes and calculated at the applicable rates recognizing the corporation
as a component member of a controlled group of corporations as defined in
the Internal Revenue Code. Deferred income taxes are the result of
differences between the basis of certain assets and liabilities for
financial and tax purposes due to the Company using the cash basis method
of accounting for federal income tax purposes. The deferred taxes
represent the future tax return consequences of those differences, which
will either be taxable or deductible when the assets and liabilities are
recovered or settled.
The net deferred tax liability consists of the following as of October 31,
1998 and 1997:
1998 1997
--------- --------
Deferred tax liability $166,300 $181,500
Deferred tax asset (83,400) (69,800)
Valuation allowance 0 0
--------- --------
$ 82,900 $111,700
========= ========
The deferred tax liability (revenue recognized in the financial statements
which will result in future taxable income) results from various accounts
receivables and prepaid expenses. The deferred tax asset (amounts expenses
or liabilities recognized in the financial statements for which a future
tax deduction will be taken) results from various liabilities and an
allowance for doubtful accounts which have no tax basis. The difference in
depreciation methods also causes the deferred tax asset.
The tax provision differs from the expense that would result from applying
statutory rates to income before income taxes because of officer's life
insurance and entertainment expenses incurred by the Company. The
Company's tax liability was reduced by foreign tax credits of $23,300 and
$19,000 in each of the years ended October 31, 1998 and 1997,
respectively.
7. RETIREMENT PLAN
The Company maintains a qualified defined contribution 401(k) plan which
was adopted as o January 1, 1996. Company contributions to the plan are
discretionary as determined by the Company's board of directors. The
Company did not make contributions to the plan, but allowed eligible
employees to make elective income deferrals to the plan per plan
specifications.
8. CONCENTRATION OF CREDIT RISK
The Company maintains its cash balances in one financial institution
located in Detroit, Michigan. The balances are insured by the Federal
Deposit Insurance Corporation (FDIC) for up to $100,000. At October 31,
1998, the Company's cash balance was $240,491. At times such balances have
been in excess of FDIC insurance limits.
9. SUBSEQUENT EVENT
See not 4, Commitments and Contingencies, regarding a term loan guaranteed
by the Company that was refinanced after year-end.
<PAGE>
AJAY SPORTS, INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Overview
On June 23, 1999, Ajay Sports, Inc. (the "Company"), through a majority owned
subsidiary, acquired all of the outstanding capital stock of Pro Golf of
America, Inc. ("Pro Golf"), a Michigan corporation (the "PG Stock"), all of the
ownership interests in PGD Online, LLC ("PGD"), a Michigan limited liability
company (the "PGD Interests") and certain accounts receivable and certain other
assets of State of the Art Golf, Inc. ("SOTA"), a Michigan corporation (the
"SOTA Assets"), for a combined purchase price of $10,500,000 and assumption of
SOTA's accounts payable related to the acquired accounts receivable. The PG
Stock and the PGD Interests were acquired from Robert Sage and the Jack London
Revocable Living Trust. The SOTA Assets were acquired from SOTA and the owners
of SOTA are Robert Sage and the Jack London Revocable Living Trust. Prior to the
acquisition, there were no relationships between the Company's affiliates,
directors or officers and any of Pro Golf, PGD, SOTA, Robert Sage or the Jack
London Revocable Living Trust, or any of their respective affiliates, directors
or officers.
The pro forma condensed consolidated balance sheet as of June 30, 1999 is based
on the historical balance sheets of the Company and Pro Golf (included elsewhere
herein) and makes certain assumptions with adjustments for officer wage
reductions, tax benefits, and interest expense on acquisition indebtedness. The
pro forma statements do not reflect other additional revenues expected to be
generated as a result of the synergies created by the acquisition of Pro Golf or
the new vendor programs or franchise expansions expected to occur, nor do they
reflect any additional expenditures expected to be incurred to undertake these
expansions and new programs. The pro forma condensed consolidated statement of
operations for the six months ended June 30, 1999 and for the year ended
December 31, 1998 include the historical statement operations of the Company as
reported on Form 10-Q for the quarter ended June 30, 1999 and Form 10-K for the
year ended December 31, 1998. The pro forma condensed consolidated statement of
operations for the six months ended June 30, 1999 includes Pro Golf's historical
statement of operations for the six months ended June 30, 1999. The pro forma
condensed consolidated statement of operations for the year ended December 31,
1998 includes Pro Golf's audited statement of operations for the year ended
October 31, 1998.
These pro forma financial statements have been prepared for comparative purposes
only and do not purport to indicate what necessarily would have occurred had the
entities been combined since the applicable date, or what results may be in the
future. The accompanying pro forma condensed consolidated financial statements
should be read in conjunction with the historical financial statements of the
Company and Pro Golf (included herein).
<PAGE>
Ajay Sports, Inc. and Subsidiaries
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 1999
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Ajay Pro Forma Pro Forma
Sports, Inc. Pro Golf Adjustments Consolidated
--------------- ---------- ------------- -------------
ASSETS
Cash $ 45 $ 418 - $ 463
Marketable Securities 484 0 - 484
Accounts Receivable, net 2,907 1,307 - 4,214
Inventories 4,925 17 - 4,942
Prepaid Expenses 548 273 - 821
------------ ---------- ------------
Current Assets 8,909 2,015 10,924
Fixed Assets, net 1,653 101 - 1,754
Other Assets 139 6 - 145
Deferred Tax Benefits 756 0 4,382 (1) 5,138
Goodwill 1,599 28 6,012 (2) 7,639
----------- ----------- --------- -----------
Total Assets $13,056 $ 2,150 $10,394 $ 25,600
=========== =========== ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes Payable to bank 195 0 8,500 (3) 8,695
Accounts Payable 2,384 778 - 3,162
Accrued Expenses 608 161 - 769
Current Liabilities 3,187 939 12,626
Note Payable - Long Term 7,138 0 2,070 (3) 9,208
Note Payable - Affiliates 1,587 0 - 1,587
------------ ----------- ----------- ---------
Total Liabilities 11,912 0 23,421
Shareholders' Equity 1,144 1,211 (176) 2,179
------------ ----------- ----------- ---------
Total Liabilities and
Stockholders' Equity $ 13,056 $ 2,150 $ 10,394 $25,600
============ =========== ============ =========
See notes to unaudited pro forma condensed consolidated financial statements.
</TABLE>
<PAGE>
Ajay Sports, Inc. And Subsidiaries
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months ended June 30, 1999
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Ajay Pro Forma Pro Forma
Sports, Inc. Pro Golf Adjustments Consolidated
------------ --------- ----------- ------------
Net Sales/Revenues $ 8,823 2,055 - 10,878
Cost of Sales 7,638 - 7,638
----- ------
Gross Profit 1,185 3,240
Selling, General and
Administrative Expenses 1,836 1,704 (30) (4) 3,510
Interest Expense 528 12 450 (5) 990
Other Expense(Inc.) 70 (10) 75 (6) 135
------ ------ ------
Income (loss) from operations
before income taxes (1,249) 349 (495) (1,395)
Income taxes (expense) benefit 275 (122) 335 488
------- ------- -------- -------
Net income (loss) (974) 227 (160) (907)
======= ======= ======== =======
Net income (loss) per share
See notes to unaudited pro forma condensed consolidated financial statements.
</TABLE>
<PAGE>
Ajay Sports, Inc. and Subsidiaries
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Ajay Pro Forma Pro Forma
Sports, Inc. Pro Golf Adjustments Consolidated
------------ --------- ----------- ------------
Net Sales/Revenues $ 22,925 4,354 - 27,279
Cost of Sales 19,477 - - 19,477
-------- ------
Gross Profit 3,448 7,802
Selling, General and
Administrative Expenses 3,868 4,274 (1,641) (4) 6,501
Interest Expense 1,139 0 900 (5) 2,039
Other Expense(Inc.) ( 84) 0 150 (6) 66
-------- ------ ------- -------
Income (loss) from operations
before income taxes (1,475) 80 591 (804)
Income taxes (expense) benefit - (56) 337 (7) 281
--------- ------- ------- -------
Net income (loss) (1,475) 24 928 (523)
========= ======= ======== =======
Net income (loss) per share (0.47) (0.17)
========= =======
Weighted average common
shares outstanding 3,909
See notes to unaudited pro forma condensed consolidated financial statements.
</TABLE>
<PAGE>
Ajay Sports, Inc.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
Note 1.
The pro forma financial statements are presented to show the financial position
and results of operations of Ajay Sports, Inc. and Pro Golf as if the purchase
had occurred on the dates discussed on the overview.
The pro forma adjustments to the condensed consolidated balance sheet are as
follows:
1999
--------
(1) Deferred Tax Benefit $4,382
(2) Goodwill $6,012
(3) Notes Payable $10,570
The pro forma adjustments to the condensed consolidated statements of operations
are as follows:
1999 1998
-------- ---------
(4) Elimination of Pro Golf owner compensation. $ 30 $1,641
(5) Increase in interest expense $ 450 $ 900
(6) Increase in goodwill amortization $ 75 $ 150
(7) Income tax $ 335 $ 337
